All too often I meet investors who overlook crucial market research AND fail to educate themselves on the current property marketplace.
They buy a property they ‘love’ in a popular suburb, which more often than not, results in a tale of woe at many future dinner parties.
Property investing is a long-term undertaking and demands a holistic approach to achieve the main objective for investors – wealth creation. This approach must include solid, personalised planning, sound finance, structure strategies and research to achieve property investment success.
Australian Property Monitor’s senior economist, Dr Andrew Wilson is a stickler for patience opposed to a high-risk, smash-and-grab approach to investing.
‘ALWAYS take a medium to long-term view of the market. Don’t look for short-term results,’’ he says.
‘Focus on equity maintenance and building over time. And take a conservative view on leveraging.’
When asked at a recent seminar what challenges the new generation of investors face, he had this to say:
’Increasing direction by so-called self-appointed specialist residential investment market analysts herding investors in lumps to so-called investment hot spots with the promise of short-term high capital gains.
This tends to cause an overshooting of underlying market fundamentals that leads to lengthy market corrections.’
While I agree that dodgy get-rich quick schemes should be seen for what they are, they have always been around in one form or another.
A far greater challenge for young investors is to resist the urge to feel defeated without even starting under the weight of constant media harping about lack of affordability in rising property markets.
Who wouldn’t feel spooked by the great myth that property investment is for the rich? In reality, you will find many notable investors started with next to nothing.
My advice to young investors is to rent where you live and, sooner than later, start a property investment portfolio, taking advantage of tax benefits and compound interest.
But first and foremost DO YOUR RESEARCH and set a plan.
Research is relatively easy today with the mountain of relevant Internet data available on some excellent property sites. Not all are free but the subscription cost is not usually prohibitive either.
The best ones are well-designed and cover a range of topics that include sales and rental prices in selected suburbs, the average number of days properties stay on the market in each suburb, demographics (social trends that impact on vacancy rates), and auction clearance rates.
Something as simple as proposed zoning changes (found on individual council websites) also makes interesting reading for the property investor. Local councils every decade (varies from country to country) renew their Local Environment Plan which can affect what you can do with an individual property.
If such a change, for example, allows you to increase the height of your investment property that theoretically could allow for an extension – better still one that catches an ocean view to maximize your investment earnings!
In short, doing your homework and executing the right initial strategy will ramp up long-term wealth.
GETTING DOWN TO THE NITTY GRITTY
All savvy investors have specific objectives and set themselves a detailed timeline to achieve their financial goals. Without a correct action-oriented strategic plan you will fail to realise your true financial potential.
A friend’s experience a few years ago always springs to mind when talk turns to realising, or in her case, spectacularly failing to realize financial potential.
She (we’ll call her Susan) lurched into the property market with a $400,000 investment unit in Manly, one of Sydney’s most beautiful seaside suburbs, not far from where she lived.
In other words she allowed her heart to rule her head and then paid full stamp duty, had nothing to depreciate and the yield was around 4 per cent.
Adding to this awful scenario was the fact that she bought at the peak of the Sydney market when the right time is usually when it is coming out of a trough.
American billionaire Warren Buffett, considered the most successful investor of the 20th Century, has a famous quote on timing which is worth keeping in mind:
‘I will tell you how to become rich…be fearful when others are greedy. Be greedy when others are fearful.’
In the seven years Susan owned the property it increased in value by 10 per cent in total, when property should ideally increase by an average of seven per cent per year.
In comparison, we put a client onto a four-bed house and land package where stamp duty was only payable on the land. The government at the time was offering 100 per cent stamp duty exemption on the home – a saving of between $9,000 and $18,000.
The yield was five and a half per cent and after depreciation the client was only paying $20 per week to hold the property instead of $170 Susan was paying. In the first three years the property increased by 20 per cent.
If we look at this over time, if Susan had chosen in the right market conditions (markets historically double every 10 years), she would have had $2,000,000 in equity instead of $400,000.
This is a sample of a chapter in the book Making Money and Financial Freedom. The chapter is written by Milly Brigden, Co- Founder and Licensee-in-Charge at PropertyIS. Pick up your copy of Making Money and Financial Freedom at Mithra Publishing.